The opaque lending of China to developing countries has missed the eyes of the World Bank and other regulatory institutions. The reporting is far from transparent, as one would assume that the Chinese prefer to do their credit work under the radar. With that said, let’s try to establish some data points.
“Between 2000 and 2017, other countries’ debt owed to China soared ten-fold, from less than $500 billion to more than $5 trillion,” according to the study from Germany-based think tank the Kiel Institute for the World Economy.
“For 50 developing countries which have borrowed from China, that debt has increased on average from less than 1% of their GDP in 2015, to more than 15% in 2017,” according to estimates by the study’s researchers.
I did the math. That is an increase of 14% of GDP in 2 years!
Now that we have a peek into the numbers, who is it who is on the hook to China for this $5 trillion? Loan talks with Belarus, funding for bridges in Liberia, a possible gas project in Timor-Leste, and pledges to support the Rwandan private sector are but a few happening in the last month or so. While the size of this lending wave is large, it is not its most distinct characteristic.
What is truly remarkable is how little anyone other than the immediate players know about this. We have seen this movie played out before. Poor country borrowers’ external debt obligations may have reached the point where repayment difficulties have begun to emerge, leaving China’s development banks with considerable exposure to risky or nonperforming sovereign loans.
According to Carmen M. Reinhart, professor of the international financial system at Harvard University’s Kennedy School of Government, “I suspect widespread debt-servicing difficulties are on the rise among many of the world’s poorest countries. China’s tendency to favor collateralized loans raises particular challenges.” The terms of such loans may well affect the seniority among lenders, typically placing official bilateral loans at the bottom.
What isn’t mentioned by the academician is a more nefarious approach by China to call in its outstanding debt and take possession of the actual underlying collateral. Perhaps this is part of the larger scheme of the Belt and Road Initiative.
This collateralized debt hasn’t gone totally under the radar. Last year, the World Bank referred to one such instance of Chinese loans to Venezuela, which were denominated in barrels of oil. The regions most indebted to China are countries in central and Far East Asia, such as Laos and Cambodia, with those in Latin America next on the list.
Perhaps it is as simple as China filling a credit void. While the official institutions lend to developing countries at below-market interest rates, China often lends at market rates and at shorter loan periods, thus increasing the odds of such debt becoming distressed. While a remote possibility, China, in longing for economic respect, could be adding to its repertoire the idea of ousting the dollar for the yuan as the global standard. This would be a stretch even for Chairman Xi.